One of the country's leading behavioral economists, Sendhil Mullainathan, who currently teaches at Harvard but was the CFPB's head of research, recently gave an interview to the American Banker's Kevin Wack, in which Professor Mullainathan made some points that concern CFPB critics like the author of this screed sheet, but also contain indications that at least some true believers in behavioral economic theory are fair minded enough to understand the dangers of pushing the envelope with any economic theory.
First, the scary part.
Mullainathan teaches at Harvard, and he is the co-author of a new book, "Scarcity," that has important implications for the consumer finance industry.
The book argues that the short-term thinking of many poor people — who worry about how to pay their immediate bills without much regard for their long-term financial outlook — is a psychological consequence of the scarcity they face. Their lack of money taxes their mental bandwidth, and leads them to a narrow, short-term way of thinking.
The book draws analogies between people who are poor, people who are extremely busy, and people who are lonely. In all three cases, people lack something they need, and it clouds their judgment.
"You might see someone who's poor go to the mall and buy something that they don't need," Mullainathan explains. "And you'd be like, 'How can somebody at the edge waste so much money?' Now, picture someone else you know who's so busy, but goes and spends hours wasting time on the Internet. And you might say: 'How could someone who's so busy end up wasting so much time?' And those are so very similar behaviors on some level."
Thus, the contention is that poor people are too dumbed-down by their lack of funds to think straight. Who'll do their thinking for them? Why, the not-so-poor people who work for the CFPB, that's who! If salary level increases brain power, then The Adjustment Bureau ought to be crawling with Einsteins.
Do you see the danger of this line of thinking? I do. Apparently, so does the intellectually honest Professor Mullainathan, at least he does while answering a question put to him by Wack.
You alluded to an argument that some conservative critics of behavioral economics have made, that this is just sort of a way to put a veneer of academic responsibility on paternalism. Do you think that's a real danger, or is it kind of a caricature of what's going on?
I think it's a real danger. I'll give you two very extreme examples. When you look at drug behavior for diabetics, that has really large consequences, when diabetics fail to take their medication. Like 100,000 limbs are lost every year because people aren't taking their meds. This is a pill with very few side effects. I mean, it's just a no-brainer.
Drinking sugary sodas? Now, that's a much harder case to make. Because soda provides some utility, and there's no doubt it has some health costs. It's easy to imagine somebody looking at that tradeoff and saying, "Fine, I'm going to live a little bit less in my life. But I love the utility. I want to drink it."
Somewhere what ends up happening is: the same principle tries to be applied to the soda case. You can see it already happening, and I think it's a legitimate concern. I think that what's a mistake is saying that because we have that legitimate concern, we shouldn't do anything.
The word "legitimate" raises the question as to whether the conclusion drawn by the economists regarding the "problem" are supportable: a shortage of money clouds the judgment of poor people. Let's assume that empirical research supports that conclusion. The next question becomes what, if anything, is the "something" that should be done about it and, assuming that there is a public policy consensus by a majority of American voters that "something" should be done, what, exactly is that "thing" and who or what should "do it."
These are all legitimate issues to be considered and debated. Unfortunately, there doesn't seem to be much debate, at least in the political arena. Instead, there seems to be an agenda that is being pushed that it is the duty of the government, particularly the executive branch, and particularly the federal executive branch, to protect the "brain fogged" from the the consequences of their own behavior, even if the "victims" don't want that protection and even if opponents think that adult citizens need to be responsible for the consequences of their own decisions, whatever the reason for their particular "brain fog." My lack of sex may fog my brain to the point that I spend money on a Corvette convertible, damning me to a protracted battle with monthly car payments approaching four figures, as well as to the ridicule of my peers, but is that the responsibility of the government to prevent? If so, I wish to hell they'd been on the case.
Much of our consumer-focused economy is based on the fact that businesses influence the consumer to purchase "stuff" he or she doesn't really "need" in an absolute sense, based on unconscious motivations that cloud the consumer's judgment. Madison Avenue was built on the bodies of bikini models draped across the hoods of sports cars. The implications for the future of our economic system, and, ultimately, our political system, extend beyond the relatively low-hanging fruit of payday lending or overdraft fees.
So, let's keep the "debate" going, even if for the folks in agencies like the CFPB, the "debate" is likely over. They're busy grinding out empirical research that will demonstrate that payday lending is just the tip of the iceberg. There will be all kinds of "brain fog" from which the "unfogged" must save those without the cerebral wattage to power through the problem to the "correct" solution.